Vodacom recently released its financial results for the year ended 31 March 2019, which revealed that the company’s capital expenditure related to its roaming agreement with Rain is R2.346 billion.
“In terms of the Vodacom’s facilities leasing, services and roaming agreements with Rain, the group will incur R1,121 million (31 March 2018: R1,225 million) future capital expenditure,” Vodacom said.
While it is understandable that Vodacom needs to pay Rain to roam on its network, it raises the question as to why it has such a high capital expenditure linked to this deal.
Vodacom explained that Rain procures the active radio equipment, OSS systems, and software required for its network and roaming agreement.
Vodacom, in turn, provides Rain with access to its passive infrastructure, which include mast space, shared antennas, space in its containers, power, and cooling.
“Vodacom incurs costs to upgrade its passive infrastructure to accommodate Rain. Vodacom also incurs costs to install Rain’s active equipment on its sites,” the company said.
Hurting Vodacom’s bottom line
Vodacom’s results also showed that the company’s data revenue grew by 3.9% to R24.3 billion – and now contributes 43.5% to service revenue.
While the company grew its top line over the past year, earnings before interest, tax, depreciation and amortization (EBITDA) declined 1.3% to R27.7 billion.
Vodacom said its EBITDA margin of 38.9% contracted partially as a result of the roaming agreement with Rain.
“This affected margins by 0.7%, as we continue to scale up on the roaming agreement, and move cost of capacity from depreciation to direct expenses,” Vodacom said.
This result is not surprising. Vodacom is increasingly using Rain’s network for 4G roaming as data demand increases on its own network.
As it needs to pay Rain for data roaming, its margin on data used on the Rain network is much lower than data used on its own network.
The data roaming charges paid to Rain also make it more difficult for Vodacom to reduce data prices, especially on larger data bundles with lower per-MB rates.